Congress Passes the American Taxpayer Relief Act

After a long and difficult negotiation process over the last several months, Congress finally passed extender legislation that allowed the nation to avert the fiscal cliff. The Senate and House of Representatives each approved H.R. 8, the American Taxpayer Relief Act, on January 1, 2013. The President has subsequently signed the bill into law.

High impact individual provisions
• Income tax rates go from 35% to 39.6% for individuals earning more than $400,000 ($450,000 for joint filers, $425,000 for heads of household) (2013 and forward);
• The 2% payroll tax cut has been allowed to expire (2013 and forward);
• The alternative minimum tax (AMT) patch (higher exemption amounts and personal credits allowed to offset regular tax and AMT) has been made permanent (2012 and forward);
• Dividend and capital gain rates increase from 15% to 20% for individuals making at least $400,000 ($450,000 for joint returns) (2013 and forward);
• The Personal Exemption Phaseout (PEP) is now reinstated at threshold levels of $300,000 for joint filers and surviving spouses; $275,000 for heads of household; $250,000 for single filers; and $150,000 for married taxpayers filing separately (2013 and forward);
• The “Pease” limitation on deductions is now reinstated at threshold levels of $300,000 for joint filers and surviving spouses; $275,000 for heads of household; $250,000 for single filers; $150,000 for married taxpayers filing separately (2013 and forward);
• A group of individual tax measures have been extended (2012 and 2013);
o Educator expense deduction;
o Tuition and fees deduction;
o State and local sales tax deduction;
o Deduction for mortgage insurance premiums;
o Tax-free distributions from IRAs for charitable purposes;
o Nonbusiness energy property credit for energy-efficient homes;
• There is a five-year extension of credits, including the college tuition credit, earned income credit and the child tax credit, that were enhanced as a result of the stimulus act (2013 and forward).
High impact business and other provisions
• Increased expensing limitations ($500,000 limit with a $2,000,000 phaseout) and treatment of certain real estate as section 179 property (2012 and 2013);
• Extends and modifies 50% bonus depreciation (2013);
• Research credit is modified and extended (2012 and 2013);
• Work opportunity credit extended (2012 and 2013);
• Exclusion of 100% of gain on small business stock acquired before January 1, 2014;
• Extension and modification of reduction in S corporation recognition period (5 years) for built-in gains tax (2012 or 2013);
• Various energy credits were extended; and
• For estate, gift, and generation-skipping transfer (GST) tax purposes and individuals dying and gifts made after 2012, there is a $5 million exemption and the top rate increases from 35% to 40% (2013 and forward).